Refiner, miner on watch list
By John Dorfman
Published: Tuesday, Oct. 8, 2013, 12:01 a.m.
No investors want to see a stock go down — unless they haven't bought it yet.
For opportunists looking for beaten-up stocks that might rebound, each quarter I publish my Casualty List. It contains stocks that were pummeled in the latest quarter and that I think have excellent comeback potential.
In the Casualty List column a year ago, I selected Gentex Corp., which returned 49 percent from Oct. 2, 2012, through Oct. 2, 2013; Guess Inc. (31 percent), Intel Corp. (4 percent) and Norfolk Southern Corp. (24 percent). Collectively, the four stocks have returned 27 percent, compared to 17 percent for the Standard & Poor's 500 Index.
The long-run results for these fallen angels have been good. From mid-2000 through today, I've written 42 columns on this topic. One-year returns can be calculated for 38 columns. The average one-year return has been 23.5 percent, compared to 8.0 percent for the S&P 500.
Of the 38 lists, 28 have been profitable and 25 have beaten the index.
Bear in mind that past performance doesn't guarantee future results. Results for my column recommendations are hypothetical and don't reflect trading costs or taxes. And the results of my column recommendations shouldn't be confused with returns I obtain for clients on real-money portfolios.
Tesoro Corp., a refiner based in San Antonio, dropped 15 percent in the quarter. I believe that refiners as a group are oversold and due for a bounce.
One thing ailing the refiners is the high price of their chief raw material, oil. In the past few years, oil has mostly traded at between $70 and $100 a barrel. Today, it is around $104, partly because of the Syrian crisis and fears of supply disruptions in the Mideast.
Perhaps the price of oil will go even higher. But at $44, Tesoro seems to me to be discounting most problems that are likely to arise. It sells for seven times earnings and less than 0.2 times revenue.
One of the hardest-hit stocks was Allied Nevada Gold Corp. (ANV), a gold and silver miner with headquarters in Reno. It plummeted 33 percent in the quarter and is down 87 percent this year.
Clearly, Allied Nevada is struggling. It has renegotiated terms with its lenders, has seen delays in construction of a mill, has reported higher expenses than anticipated, and — like all gold miners — has suffered from a decline in the price of gold.
With the stock below $4, down from more than $27 when the year began, Allied Nevada stock has been trading like a bankruptcy candidate. While the balance sheet is on the weak side, I see no indication that the risk of bankruptcy is high.
The company had a positive book value (corporate net worth) of about $7 a share as of June 30. And the stock is trading well below that figure. No doubt it is risky, but the potential return is large.
Iridium Communications Inc. (IRDM), based in McLean, Va., offers satellite-based communications services to businesses, government agencies and individuals. It fell 11 percent last quarter because of an earnings shortfall reported on Aug. 1.
Five days after the earnings announcement, CEO Matthew Desch paid a little more than $100,000 to buy 15,000 Iridium shares on the open market.
I believe Desch's purchase shows his faith in the long-term prospects for the company. Corporate executives usually have their cup filled through stock options, so when they drink from the open market, it can mean they think the stock price is a compelling value.
Desch paid a bit over $7 a share to buy. The stock in the past few days has been trading between $6.65 and $6.90.
Back in 2006-07, Crocs shoes were a popular fad, and Crocs Inc. (CROX) stock was flying high. I thought the stock was overvalued and sold it short in a hedge fund I co-managed at the time.
I was forced to cover the position at a loss as Crocs continued to soar. The shares tripled to $75 in 2007, before collapsing to less than $1 a share the following year. Thus, I exemplified an old Wall Street saying: “What's the difference between being early and being wrong? There isn't any.”
Today, Crocs has sales higher than it did back in 2007. Its earnings are lower (because it can no longer sell its shoes at huge mark-ups) but not markedly so. Yet the stock price today is less than $14 a share, or less than one-fifth of the 2007 peak.
John Dorfman is chairman of Thunderstorm Capital in Boston and a syndicated columnist. He can be reached at email@example.com.
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